Rainstorm in a dry spell

Small Business Jobs Act spurs a rush of loan activity, with promise of more

When Randall Fogle set out to restructure his company’s commercial loans last year, his banker suggested turning to a federal agency Fogle had never worked with: the Small Business Administration.
The banker, Aaron Green, a business development lender with Farmers & Merchants Bank in Shenandoah County, hadn’t worked with the loan guarantor much, either. “I probably worked with the SBA on 15 to 20 percent of my loans at the most before September,” he says. “But I’ve used SBA programs on the majority of my loans since then.”

That boost in SBA business came as a result of the Small Business Jobs Act of 2010, which went into effect in September.

The act included eight tax cuts for small businesses and higher loan limits for the SBA’s 7(A) and 504 loan programs. (The 7(A) loan program provides loan guaranties for small businesses unable to secure financing on reasonable terms through standard lending channels. The 504 loan program provides businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.)

The act also expanded the number of businesses eligible for SBA-guaranteed loans. But a temporary increase in the guarantee the agency offers to lenders on its 7(A) loans got the most attention in the months since the act’s signing. Now, the SBA would guarantee 90 percent of a loan, up from the previous sliding scale of 75 to 85 percent.

In a tight credit market, those increased guarantees sweetened the deal for many lenders. “They mitigated some of the risks banks face lending to small business,” Green says.

Another major benefit: The act temporarily waived the fees borrowers typically pay the SBA for 7(A) loans, which range from 2 percent to 3.5 percent of the guaranteed portion of the loan. (Both the fee waiver and increased guarantees were extensions of benefits first offered in the American Recovery and Reinvestment Act of 2009. They expired May 31.)

Because of the increased interest in SBA loans, Fogle’s Woodstock-based Fort Valley Nursery Inc. found itself working against the clock. The act had created a $505 million subsidy to cover fee waivers and anticipated losses on the increased 7(A) loan guarantees, which were slated to end March 4.

The nursery applied for two SBA-guaranteed 7(A) loans from Farmers & Merchants Bank in October. On Dec. 1, the loans were approved for a total of $2.4 million. By Dec. 31, “an unprecedented increase in loan applications” exhausted the $505 million subsidy, says Ron Bew, district director for SBA’s Virginia district office. (The Richmond-based Virginia district covers all of the state but Fairfax and Loudoun counties and the cities of Alexandria, Falls Church and Fairfax, which are part of the Metropolitan Washington district office.)

Think of the situation as a much-needed rainstorm in the middle of a long dry spell for the credit market. “Nationwide, we did $10 billion in loan guarantees in three months versus $17 billion for the entire year ending Sept. 30, 2010,” Bew says. “In Virginia, we guaranteed 329 loans for $135 million from October through December last year versus 256 loans for $69 million the year before in the same quarter.” That helped boost the SBA’s lending in the commonwealth last year 18.5 percent above its 2009 performance.

The SBA worked with 105 lenders (including banks, credit unions and non-bank lenders) on loans in Virginia last year. “BB&T is our No. 1 lender, and SunTrust is No. 2,” Bew says.

The act’s perks for small-business lending aren’t finished, either. A temporary change to the SBA’s 504 loan program now allows some small businesses to use it to refinance their owner-occupied real estate mortgages. This change, which will be in effect until Sept. 27, 2012, will help businesses “facing the negative impact of declining real estate values and potential foreclosure,” Bew says. “It’s the most exciting loan program I’ve seen in the last five years.”

To handle what it expects to be a significant increase in lending as a result of the temporary changes to the 504 loan program, the SBA has hired an additional 50 people in California to process loans, Bew says. (The SBA has 2,100 employees across the United States.)

SunTrust Banks Inc. also has hired more specialists to focus on SBA loans, although planning for the new hires predated the Small Business Jobs Act and is part of a long-term strategy to utilize SBA programs. “We have hired 10 SBA officers whose sole job is to work with clients to put SBA deals together,” says Jeff Nager, the Raleigh-N.C.-based senior vice president and SBA division executive for SunTrust. “This is a core part of what we do — it’s not one or two a year.” Last year, SunTrust approved 92 SBA-guaranteed loans totaling $16 million in Virginia.

In the meantime, the SBA-guaranteed loans Fogle secured for his nursery are bearing fruit. In addition to allowing the company to restructure its debt, the loans provided operating capital for its spring purchasing. The money also secured jobs for the company’s landscaping and retail employees. “That wasn’t the sole purpose of the loans, but it was definitely in the picture,” Fogle says.